Legal Briefing

Mitigation: cynical defendants beware

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Corporate and commercial | 01 April 2015

An innocent party seeking to claim damages for breach of contract must take reasonable steps to mitigate its losses. This is a well-established principle of English law that has proved many a defendant’s ally.

However, while defendants should (and can) expect the courts to ensure claimants seek to minimise their losses, the High Court’s decisions in Gul Bottlers (PVT) Ltd v Nichols plc [2014] and Fulton Shipping Inc of Panama v Globalia Business Travel SAU of Spain [2014] have demonstrated that courts are not sympathetic to defendants that seek unreasonably to circumvent their liabilities to make a claimant ‘whole’ by relying on a strained interpretation of the obligation to mitigate.

GUL BOTTLERS V NICHOLS

The claimant, Gul Bottlers, sought damages for lost profits following an alleged repudiatory breach of a licence agreement by Nichols. Under the licence, Nichols had granted Gul Bottlers the right to produce and distribute Vimto double strength cordial and carbonated Vimto in Pakistan for a five-year period. In anticipation of the product’s launch, Gul Bottlers incurred significant expenses on advertising, upgrading machinery and leasing new premises. However, shortly before the scheduled launch, Nichols unilaterally raised the price for the licence and refused to supply double strength cordial, offering only a single strength alternative in its place. Gul Bottlers contended that Nichols had been motivated to repudiate the contract as a result of pressure from its largest distributor who produced and bottled Vimto products outside of Pakistan but enjoyed significant revenues from ‘grey market’ sales within the country.

At a considerably later stage, by which point proceedings were already underway, Nichols wrote to Gul Bottlers offering them a new licence agreement on terms largely reflecting those that had originally been agreed. Gul Bottlers rejected the proposed new agreement, stating that they had no confidence in a continuing relationship with Nichols and that they regarded the offer as a legal stratagem rather than a bona fide offer.

Nichols eventually conceded liability but argued that, in spite of its own conduct, Gul Bottlers had failed to mitigate its losses by refusing to enter into the new licence agreement.

JUDGMENT

In reviewing the principles of mitigation, Cooke J explained that for the refusal of such an offer to amount to a failure to mitigate, the defendant had to show that the claimant acted unreasonably in refusing. He further clarified that the question of what was reasonable in the circumstances was not a question of law but one of fact.

In the present case, he found there had been no bona fide proposal, but rather, as argued by Gul Bottlers, merely a legal stratagem made in the belief that it would not be accepted and with a view to adding a defence to an otherwise untenable position. This view was supported by the contents of the offer letter in which Nichols had explicitly refused to accept any degree of wrongdoing but betrayed its true intention in stating:

‘If your client chooses to reject this offer then we will of course refer to this letter in the course of any proceedings that are subsequently issued by your client and, in particular, by reference to your client’s duty to mitigate its losses’.

Presented with clear evidence of hostility between the parties and in the context of the apparent historical disregard with which Nichols had appeared to treat its contractual obligations, Cooke J held that Gul Bottlers had not acted unreasonably in refusing the offer of a new licence. Gul Bottlers could not be expected to renew relations with a company that had entirely eroded any good will or trust between the two in the preceding months and therefore Nichols had no basis to argue that any lost profits stemmed from this decision as opposed to the original breaches.

FULTON SHIPPING V GLOBALIA

In Fulton Shipping, the claimant, a ship owner, sought damages from Globalia Business Travel for repudiation of a time charter. The original charter, due to end in October 2007, had been extended until November 2009. In August 2007 Globalia reneged on this extension. Fulton Shipping accepted the breach as terminating the charterparty, immediately sold the ship for $23,765,000 upon its return in October 2007 and commenced proceedings for loss of profit.

In the course of the initial arbitration it was determined that, had the vessel been sold at the conclusion of the two-year extension to the charterparty, the value would have been eroded by the impact of the global financial crisis to the significantly lower figure of $7m. Globalia argued that Fulton Shipping should give credit for the difference between the vessel’s actual sale value and the price that would have been obtained in 2009. The arbitrator held that this was the appropriate approach to valuation and consequently reduced Fulton Shipping’s claim for loss of profit to zero.

Fulton Shipping appealed to the High Court on the grounds that the arbitrator had erred in respect of a matter of law: the benefit should not be taken into account as it had been of a different kind to the loss to that suffered as a result of the breach.

JUDGMENT

Popplewell J highlighted the complexity of deciding whether a claimant is bound to bring a benefit into account in calculating his damages (describing the search for a single general rule as ‘elusive’) but rejected the notion that this be determined by simple application of the compensatory principle. However, he offered the following principles that emerged from his review of the relevant authorities as a guide to whether or not a benefit ought to be taken into account:

  1. The benefit should be caused by 
the breach.
  2. The causation test must take into account all circumstances, including the nature and effects of the breach and the nature of the benefit and loss, the manner in which they occurred and any pre-existing, intervening or collateral factors which played a part in their occurrence.
  3. It is not sufficient for the breach to 
have merely provided the occasion for the innocent party to obtain the benefit, or merely triggered his doing so. Nor is it sufficient that the benefit would not have been obtained but for the breach.
  4. It should make no difference whether the question is approached as one of mitigation of loss or measure of damage; although they are logically distinct approaches, the factual and legal inquiry and conclusion should be the same.
  5. The fact that a mitigating step (by way of action or inaction) is a reasonable and sensible business decision with a view to reducing the impact of the breach, does not of itself render it one which is sufficiently caused by the breach. Such a step may be triggered by, but not legally caused by, a breach.
  6. It is insufficient to show a two-stage connection between first, the breach and the mitigating step and secondly, between the mitigating step and the benefit. There must be a direct causative connection between breach and benefit. Accordingly, benefits flowing from a step taken in reasonable mitigation of loss are to be taken into account only if and to the extent that they are caused by the breach.
  7. If the benefit arises from a transaction of a kind which the innocent party would have been able to undertake for his own benefit irrespective of the breach, that is suggestive that the breach is insufficiently causative.
  8. There is no requirement that the benefit be of the same kind as the loss. However, a difference in kind may be indicative of a lack of causation.
  9. Causation is a matter of fact.
  10. While causation is a requirement, it may not be sufficient should justice, fairness or public policy dictate otherwise.
  11. In particular, benefits caused by the breach should not be taken into account in situations where it would be contrary to justice for the defendant wrongdoer to be allowed to appropriate them for his benefit because they are the fruits of something the innocent party has acquired for his own benefit.

Applying those guidelines, Popplewell J concluded that, in the present case, it had been the owners’ decision to unlock the capital value of the vessel, and not the breach, that had given rise to the benefit in question. Accordingly, he allowed the appeal and held that the benefit should not be taken into account as it was of a ‘different kind to the loss’ being a capital benefit as opposed to a loss of income that had to be mitigated. While the breach had provided the context for the claimant to realise the benefit, it had been the ‘trigger not the cause’.

Notably, Popplewell J was keen to stress that policy grounds would also dictate that the benefit should not be taken into account in this case, even were it to have flowed from the breach. He stated that to allow the Charterers to take the benefit of what turned out to be an opportune moment in market conditions would be to allow the Charterers to appropriate the fruits of the Owners’ investment in the vessel in a way which would be unfair and unjust.

COMMENT

Both cases provide useful guidance regarding what is required from a claimant to mitigate its losses but also serve as warnings to defendants about the perils 
of relying on such obligations when defending claims. While claimants are undoubtedly under a strong obligation 
to take steps to mitigate their losses, 
that obligation is limited to what is reasonable as a matter of fact. The 
courts’ primary concern is to compensate an innocent party damaged by a breach 
and, as made clear in Gul Bottlers, the courts will not look favourably on attempts by defendants to exert pressure on claimants to take uncommercial decisions in the name of mitigation. Equally, courts do not want to penalise a claimant that has sought to take positive steps following a breach of contract. The message from Fulton Shipping could be seen to be that a defendant should not benefit from a claimant’s good independent commercial sense even if it effectively negates the damage done by the claimant (unless 
the benefit gained was as a result of the breach itself).

It should be noted that an appeal of Fulton Shipping is pending and the reasoning not universally accepted in the face of seemingly contradictory case law that suggests that a link between the breach and the benefit ought to be sufficient for the benefit to be taken into account. As Popplewell J correctly concluded, the law as it relates to mitigation is far from clear and while he provided useful guidance, it is felt by some that it did not go far enough to consolidate all relevant authorities on the subject. It is hoped that the Court of Appeal will provide some much needed certainty in this area.

It is imperative that parties faced with potential disputes take legal advice as soon as possible as to the likely quantification of the claim; claimants so that they can assess what measures they need to take to ensure that they will be deemed to have taken reasonable steps to mitigate their losses; and defendants so that they do not inadvertently proceed to trial without adequately pursuing settlement options in the false expectation that a court will protect them as a result of benefits enjoyed by a claimant following the breach.